Franchising explained


Franchising allows a business to operate under the established brand of another business. You (the franchisee) can sell their products and/or services for a specified period in return for payment to the franchisor.

If you want to start a business, buying into a franchise may be a good alternative to starting a unique venture. Similarly, if you're planning to expand your business, a well-managed franchising network may be an effective way of moving into new markets.

Consider franchising carefully


Like any business decision, you should consider franchising carefully and follow the right processes. There are laws you must follow when franchising in Australia, including the Franchise Code of Conduct and the Australian Consumer Law (ACL). But these laws can’t guarantee your success – a franchise can fail, just like any other business.

Franchising is very different to other types of business. For example, it can be extremely restrictive. You won’t have the same level of control compared to a business you run independently. Franchisors can usually control the products or services your franchise sells and where they must be sourced from.

Make sure you understand the costs of:

  • the upfront fees
  • establishing and maintaining the franchised business
  • any significant expenditure you might have to pay

Comply with the Franchising Code


All franchise participants, including franchisors and franchisees, must comply with the mandatory industry Franchising Code of Conduct.

The Franchising Code:

  • regulates actions of franchising participants
  • aims to make sure you are properly informed about a franchise agreement before you enter into it
  • aims to provide a cost-effective dispute resolution scheme for franchisees and franchisors

While the Franchising Code determines minimum standards of disclosure and conduct, it's not intended to replace independent legal, business or accounting advice before entering into a franchise agreement. Seek advice from a professional business adviser, accountant or solicitor with franchising experience before entering into a franchise agreement.

As a franchisee, the Franchising Code details:

  • your minimum rights and obligations
  • the information franchisors must disclose to you
  • the elements a franchise agreement must contain
  • a mediation procedure for disputes

Enforcing the Franchising Code and ACL

The Australian Competition and Consumer Commission (ACCC) administers and enforces the Australian Consumer Law and Franchising Code of Conduct.

They also provide guidance on your rights and obligations under these laws. Check the ACCC’s information for small businesses buying a franchise or extending or renewing a franchise agreement.

Buy a franchise (become a franchisee)


Buying a franchise means you’re buying the rights to run a business under an already established brand name. Often these rights are subject to conditions that are set out in a franchise agreement.

Before you buy a franchise, consider the same issues as you would if you were purchasing or starting any other business. Do your research and understand how it works. Also, consider the issues specific to franchises, such as what happens if the franchise or franchisor fails.

Once you enter into a franchise agreement, you’re legally committing to run the business according to the requirements set out in the franchise agreement and the franchise operating manuals.

If your franchise agreement is a standard form agreement, you should also consider if unfair contract term laws apply. A standard form contract is one that has been prepared by the other party and you have little opportunity to negotiate the terms. The ACCC website has more information on unfair contract terms and buying a franchise.

Enter a franchise agreement

The franchise agreement is a legally binding document that details the rights and responsibilities of both the franchisor and franchisee.

Before you sign a franchise agreement, obtain as much information about the franchise as possible and make sure you understand the risks.

As soon as you show a genuine interest in a franchise, franchisors must give you a short information sheet outlining the risks and rewards of franchising.

At least 14 days before you sign a franchise agreement or make a non-refundable payment, franchisors must give you:

As a prospective franchisee, it's important to understand what is being offered and your rights and obligations under the Franchising Code. You should also be aware that a franchise agreement only gives you the right to operate the business for the life of the franchise agreement. There is no guarantee that the agreement will be renewed, unless specifically negotiated under the agreement.

Manual for franchisees

The ACCC franchisee manual will help you understand:

  • what steps you need to take when choosing a franchise
  • tips to assist with your research and to verify information provided to you about a franchise opportunity
  • your rights and responsibilities under a franchise agreement
  • what to do if there is a dispute with a franchisor

Franchise your own business (become a franchisor)


If you have a successful business that you want to expand, you can consider franchising. If managed well, it can open your product or service to new markets and extend your brand's reach.

Before you franchise your business, make sure you have a successful and proven franchise model. Operating your own franchise model before selling a franchise to someone else can help prove your concept, establish demand and create sound processes and systems that can be repeated in each new franchise.

There is no specific franchise registration or approval process, but establishing a franchise is a legal process and can take some time. It's important that you plan thoroughly and seek professional advice from an accountant, solicitor or franchise consultant with franchising experience.

As a franchisor, you must comply with the Franchising Code of Conduct and Australian Consumer Law. Check the ACCC website for other laws you may have to comply with.

Under the Australian Consumer Law you must not use misleading, deceptive or unconscionable conduct in your business dealings.

If you decide to franchise your business, it’s vital that you have a good working relationship with the franchisees. Take care when you select a franchisee to ensure they are a good fit for your franchise business. Under the Franchising Code you must act in good faith in your business dealings with each other.

If you breach certain provisions of the Franchising Code, you risk financial penalties and infringement notices.

Understand your franchise tax obligations


Your tax obligations will depend on whether you are a franchisee or franchisor.

Franchisee

Franchisee businesses can operate under different business structures. Like any business, your structure, earnings and assets will determine your taxation obligations.

Ongoing franchise fees are often deductible in the year you pay them. You might be able to deduct other payments including training fees and loan interest from your taxable income. Check what you can deduct with your accountant.

When you buy, sell, transfer or terminate a franchise, taxes may apply, including capital gains tax (CGT) and goods and services tax (GST).

Franchisor

As a franchisor, you need to understand your tax obligations and how franchising fees are treated for tax purposes. It's also important to review your income tax and goods and services tax (GST) reporting requirements. In most cases all payments you receive from a franchisee will be assessable income. They will also involve GST.

As with any business, your business structure, assets and income will determine your taxation requirements.

Resolve franchise disputes


The Franchising Code of Conduct sets out a clear process for the resolution of disputes between a franchisor and a franchisee.

If you have a concern with your franchisor you can:

  • formally raise your concerns with them, including through the dispute resolution process in your franchise agreement and under the Franchising Code
  • contact the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) or a Small Business Commissioner (if available in your state or territory) for help
  • get independent advice on your rights from a lawyer, accountant or business adviser

ASBFEO can provide free support, including:

  • information on the Franchising Code of Conduct
  • options to resolve your dispute
  • access to mediation services located across Australia

The Code states that parties must act in good faith. This means parties must act honestly, and not arbitrarily, with each other and cooperate to resolve the dispute. Read more about resolving franchising disputes on the ACCC website.

Franchising resources from the ACCC


You can find a range of franchising resources from the ACCC, including:

The ACCC also supports a free, online Pre-Entry Franchise Education program for prospective franchisees provided by FranchiseEd.